Learn what home equity is, how it's calculated by subtracting your outstanding mortgage from the market value of your home, and ways to use it effectively.
Home equity is the portion of your property’s value that you truly own. Calculated by subtracting any remaining mortgage balance from the current market value of your home, it represents an important financial asset.
To calculate your home equity, use the following formula:
For example, if your home’s current market value is $400,000 and you owe $250,000 on your mortgage, your home equity would be:
Market Value Changes: Fluctuations in the real estate market can increase or decrease your home’s value.
Mortgage Payments: Regular mortgage payments increase equity as the loan principal is paid down.
Home Improvements: Renovations and upgrades can add value to your property.
Home equity can be a valuable financial resource. Here are common ways to leverage it:
A home equity loan provides a lump sum of money based on your equity, repaid over a fixed term with a fixed interest rate.
A HELOC works like a credit card, allowing you to borrow up to a certain limit based on the equity in your home, with repayment terms that fluctuate with interest rates.
This involves refinancing your existing mortgage for more than you owe, receiving the difference in cash.
Pros:
Lower interest rates compared to other loans.
Potential tax deductions on interest payments.
Cons:
Risk of foreclosure if unable to repay.
Potential for over-borrowing leading to financial strain.
Historically, home equity has been seen as a cornerstone of wealth building for homeowners, affording opportunities for investment, education funding, and emergency expenses. The concept became particularly prominent post-World War II with the rise of suburban homeownership.
A loan taken out to purchase property, secured by the property itself.
While a home equity loan provides a fixed amount with set repayment terms, a HELOC offers flexible borrowing similar to a credit line.